Bank of England cracks down on mortgages

Housebuilders, banks and markets were lifted on Thursday after the Bank of England decided against taking draconian steps to cool the housing market.

The Financial Policy Committee (FPC), which is in charge of financial stability, stressed that – while household indebtedness did not pose an “immediate threat” to the economy – it wanted to stem an increase in the number of Britons taking on high levels of debt.

But analysts said the measures unveiled by the Bank were more lenient than the market was anticipating. Nick Beecroft, a senior analyst at Saxo Capital Markets, compared them to a “paper tiger”.

“Given the underwhelming nature of today’s decision, it should do very little to remove the pressure on the Monetary Policy Committee to raise interest rates,” he said.

The pound jumped by more than half a cent against the dollar to $1.7042 on Thursday, while Barratt Developments and Persimmon, Britain’s biggest housebuilders, were among the biggest risers in the FTSE 100. Banks claimed the new rules would not have a huge impact on their lending practices.

In a package of “graduated and proportionate” measures designed to cool the market without derailing the recovery, the FPC signalled that it would be comfortable if house prices rose by 20pc over the next three years, even though current wage growth remains weak.

Under new rules recommended by the FPC:

• Lenders must ensure no more than 15pc of new mortgages are given to people borrowing more than 4.5 times their income.

• Banks will have to “stress test” borrowers’ ability to repay loans if their mortgage rate were 3pc higher than the rate at the time the loan was approved – or the equivalent of £200 extra a month on an average mortgage of £115,000.

George Osborne, the Chancellor, also announced that the Government would not underwrite any new loans larger than 4.5 times income under the mortgage guarantee element of Help to Buy.

One in 10 Britons currently borrow more than 4.5 times their income for a mortgage, although this is expected to rise to 15pc over the next year. For first-time buyers, the proportion is higher. The Bank noted that 12pc of lending to first-time buyers over the past 12 months was at a loan-to-income (LTI) ratio of 4.5 times or more. Mr Carney said almost all lenders affected by the new rules were “at or below the cap as we sit today”.

However, the FPC suggested the measures would help to target the London housing market. One in five loans in the capital is now at a loan-to-income ratio at or above 4.5.

Tough affordability rules introduced via the Mortgage Market Review in April already require lenders to stress test borrowers. However, it is currently up to banks to decide what interest rate to apply for the test.

According to the Bank’s projections, the new guidelines will not begin to bite unless “momentum in the housing market continues to build”. If house prices rose by 20pc over the next three years, mortgage approvals climbed to 90,000 a month, and wages grew by 4pc – the measures would have no impact on the market. But if approvals climb well above 100,000 a month and house prices continue to grow at double digit rates, Mr Carney said these policies, which will be formally implemented by the Prudential Regulation Authority (PRA) and Financial Conduct Authority, would start to “bite”.

The chart shows higher household indebtedness was associated with sharper falls in consumption during the financial crisis

“The measures announced by the Bank in the FSR today represent an insurance policy against overheating, rather than a fire extinguisher to put out the flames,” said Alan Clarke, head of fixed income strategy at Scotiabank.

“We recognise the need to manage any signs of pressure in the housing market and welcome the changes the FPC has made today,” said Lloyd Cochrane, head of mortgages at Royal Bank of Scotland, where 8.7pc of recent mortgage completions have been above a 4.5 times income. “Though we don’t expect to see any significant impact to our mortgage lending in the short-term, we continue to manage our business carefully.”

But Andrew Tyrie, chairman of the Treasury Select Committee, described the FPC’s move to cap the number of high LTI loans as “significant”. While apparently modest in its initial impact, it “breaks new ground”, he said.

The Bank of England has launched a consultation on the new measures, though Mr Carney stressed that he expected lenders to issue mortgages under the new guidelines immediately. “The expectation of the supervisor is that banks would implement this, pending the formal implementation,” he said.

Andrew Bailey, deputy governor and head of the PRA, said lenders were on the same side as regulators. “I don’t sense in all the conversations I have that we are pushing against the tide here in terms of the overall approach to underwriting standards and risk management.”

The FPC said the measures were designed to work alongside current Bank stress tests which are designed test lenders’ ability to weather a 35pc fall in house prices and an interest rate shock.

Mr Osborne said he “fully supported” the measures announced yesterday. “In the years before the Great Recession the failure to [act] cost families dear and took our economy to the brink.

“I want to protect those who own homes, protect those who aspire to own a home, and protect the millions who suffer when boom turns to bust.”